Another reason to worry about the federal debt bomb

Over at EconLog Bryan Caplan makes some very interesting and important observations on “How I Was Wrong About Government Debt.”

Most economists when gauging the impact of the massive government debt on the economy compare Debt to GDP, but per Caplan:

The right comparison is government debt relative to annual tax revenue. By this correct measure, the U.S. is indeed in irresponsible territory. Take 2011: With government debt at 67.7% of GDP, and government revenue at 15.4% of GDP, the U.S. debt/income ratio was already about 440%.

He adds, “Now I’m actually worried.”

The real issue is not the debt but the size and impact of the government at all levels.

Comments

  1. Why should either be a cause of worry? I understand issues of crowding out and misallocation, but as to “paying it off,” as long as the ratio stays stable and the debt somewhere near GDP, it shouldn’t be a problem.

    • How do you think they propose to pay this debt off? Either by printing money or taxing. Both are always bad for the citizen, but when you throw in interest into the mix they are even costlier. They may, of course, come at the cost of people who weren’t even alive to “consent” (even under duress, as most people do now in relation to the government) to the debt. Certain debt levels are simply much more crippling than others. Even Caplan’s proposed measure isn’t good enough. Tax revenues from industries benefiting from credit expansion i.e. make-believe wealth aren’t real. The ability of the US (and the UK, and other countries) to service its debt is non-existent.

      Looking at debt to GDP is just the worst possible way of estimating a country’s ability to repay its debt. It’s like looking at your level of spending, as a consumer, as an indicator of how easily you can pay off your personal debts. That is insane! You’d look at your earning potential.

  2. I am not sure about putting too much faith in either measure is a good idea. I remember when economists would dismiss problems of deficits and national debt by saying that “the national debt is still relatively small versus GDP.” I thought it was an economic problem then and I think its a bigger economic problem now without any need for comparisons to other large numbers. Financing government consumption with borrowed money is a bad idea on several levels.

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